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Retirement Hacks: It’s a struggle to buy a home right now and to save for retirement — here’s how you can do both

Home buying during a pandemic, and now with higher interest rates and elevated inflation, is anything but easy. Add having to save for retirement, and it might feel impossible. 

As with most things in life, managing money is about striking a balance, even when it seems unachievable. And right now, buying a home in the U.S. is particularly expensive and stressful. 

Retirement Tip of the Week: Saving for retirement and buying a home are expensive tasks, but it is possible to do both. Make a list of your financial priorities, analyze your current and near-future cash flow and do plenty of research. 

Since COVID upended how and where Americans live, would-be buyers have competed to snare a home at its asking price. Getting an offer accepted below asking has been a rare occurrence. Even if that frenzy is cooling down, prospective buyers now face higher mortgage rates that in turn boost monthly payments. About 60% of U.S. households could be frozen out of the housing market by 2025, according to an S&P Global Ratings report, in part because higher monthly payments have impaired affordability. 

A house is no longer considered affordable when mortgage payments represent 25% or more of a household’s income, the report determined. It is even more difficult to stay below that bar in higher-priced areas such as New York City and San Francisco. 

Read: Only 10% of new homes now sell for less than $300,000. Two years ago, a third did. It’s not just because of the pandemic.

Of course, saving for retirement is also important. Many Americans interested in buying a home in their 20s and 30s also are at the prime time to be investing for retirement, as money saved in that age range has the potential to grow via returns and compound interest for decades. People in their 40s and 50s are usually reaching the peak of their earning years, and every dollar they can earmark for their old age is important, especially if they weren’t able to save as much when they were younger. 

People who have already been saving for retirement are at an advantage, as they can back off their retirement savings for a while and build up the funds for a down payment, said Christopher Lyman, a certified financial planner at Allied Financial Advisors. “Younger people are generally in a better position to lower retirement savings temporarily because they have so much time to make up for it,” Lyman said. 

Having access to retirement accounts, like a 401(k) at work or an IRA outside of the workplace, helps. Even if homebuyers can’t put too much away from their future, keeping those accounts alive with smaller contributions can make a world of difference later on, since that money will continue to grow with investment returns and compound interest. Any contribution is better than no contribution, and if there’s an employer match available, workers should try to meet it to receive that “free money.” 

Have a question about your own retirement concerns? Check out MarketWatch’s column “Help Me Retire”

You may not be able to save or pay for both at the same time — homebuyers and retirement savers have to work within their means, after all. Make a list of your priorities and rank them, said Jeremy Finger, a certified financial planner and founder of Riverbend Wealth Management. For example, if retirement is the most important goal, aim to save 20% of your gross income, and then if you get an extra money, put it away for a down payment. If those percentages are not realistic for your current situation, as they may not be for some people in high cost-of-living areas or with other, heftier bills, do a lesser version of that breakdown. 

Don’t let your retirement savings go stagnant for too long, said Rob Greenman, a certified financial planner and partner of Vista Capital Partners. “Like most things in life, balance is usually good,” he said. “For those who have sacrificed funding retirement so that they could use funds to become homeowners, it’s probably time to emphasize contributions to tax-favored retirement accounts.” 

Play with the numbers when determining what’s feasible or what the consequences are of saving more for one goal over another. Financial calculators can provide an estimate of monthly mortgage payments when inputting the latest interest rates and higher home prices. When making these calculations, don’t forget to include taxes, utilities, groceries, a little extra on the side for an emergency and so on to determine what your monthly bills could potentially be. 

Also see: This single mom puts half her monthly income toward rent. How will she ever save for a house?

Buyers also may want to try to save more than the minimum down payment if they expect to do any repairs or renovations, such as painting, cleaning out the fireplace or installing central air conditioning.

The same is true for retirement. If buying a home supersedes retirement savings, try using a financial calculator to figure out the difference in what you’re saving now for retirement versus what you will be saving after you buy the home, and how those contributions with average rates of returns and inflation may change your ultimate nest egg.

Watching your spending is important, no matter the goal. People looking to buy a home already know that their income and the interest rate on their mortgage will be the biggest factors in their ability to accomplish this goal, but everyday spending also matters a lot, Lyman said. 

“Being confident in your own capacity to modify your spending behavior for this purchase is crucially important,” he said. “There are people who do not like the feeling of having to watch every penny and those who know they can, and will, watch every penny if they need to.” 

Knowing your financial attitude will also help you curtail any unexpected emergencies down the road, like not having enough money saved. “We caution those who have had trouble rein in spending against stopping retirement savings and going for the home because chances are it will be tougher for them to get back to the retirement savings level they should be at with the increased costs that come along with a new home,” he said.

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